Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Suzhou Hycan Holdings (SZSE:002787) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Suzhou Hycan Holdings is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.023 = CN¥45m ÷ (CN¥2.8b - CN¥863m) (Based on the trailing twelve months to September 2023).

Therefore, Suzhou Hycan Holdings has an ROCE of 2.3%. In absolute terms, that's a low return and it also under-performs the Packaging industry average of 4.5%.

See our latest analysis for Suzhou Hycan Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Suzhou Hycan Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Suzhou Hycan Holdings, check out these free graphs here.

What Can We Tell From Suzhou Hycan Holdings' ROCE Trend?

When we looked at the ROCE trend at Suzhou Hycan Holdings, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 2.3% from 7.1% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line

In summary, Suzhou Hycan Holdings is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Although the market must be expecting these trends to improve because the stock has gained 44% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

On a final note, we've found 1 warning sign for Suzhou Hycan Holdings that we think you should be aware of.

While Suzhou Hycan Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.